FINANCIAL MANAGEMENT

CIA 1 - HERMÈS FINANCIAL ANALYSIS

Submitted to
MR. ANAND PATIL

Submitted by:
(DIVYAM AGARWAL 2323626)

School of Business and Management, Christ University BGR

campus
(BBA FIB B FINANCIAL ACCOUNTING)

Date: 22th January 2024

Table of Contents

Executive Summary:...............................................................................

How is Hermès unique from their competitors………………………

Sales per Business for 2023…………………………………………….

Why did I chose this company?………………………………………..

Shareholder Pattern for Hermès………………………………

Sources of Finance……………………………………………………

ELYSIUM………………………………………………………………

Capital Structure Of Elysium …………………………………………

Funding Plan…………………………………………………………

EBIT-EPS Analysis…………………………………………………

Conclusion…………………………………………………………
Executive Summary:

French luxury fashion and lifestyle company Hermès is well-known for its superb craftsmanship,
stunning designs, and classic elegance.
Since 1837, generation after generation, Hermès has followed a dual
thread – on the one hand the painstaking work of the craftsman in his
workshop, and on the other the lifestyles of its customers. Carried by
an enduring spirit of freedom and creativity, Hermès remains highly
sensitive and attentive to the changing nature and needs of society.
Hermès, founded in 1837 by harness-maker Thierry Hermès in Paris,
initially focused on crafting harnesses that combined discreet finesse
with durability. Recognized for technical excellence, the brand's
success began with an award at the 1867 Universal Exhibition.
Understanding customers' desires for simplicity and lightness in a
rapidly modernizing city, Hermès laid the foundation for its legacy of
high-quality craftsmanship and timeless elegance.

How is Hermès unique from their competitors

I. Craftsmanship and Quality:

Hermès is renowned for its exceptional craftsmanship and commitment to using high-quality
materials. The brand's dedication to handcrafted production techniques and meticulous attention
to detail sets it apart in the luxury fashion industry.

II. Timeless Elegance:

Hermès designs are characterized by their timeless and classic appeal. Rather than following
fleeting fashion trends, the brand focuses on creating pieces that endure over time, contributing
to a sense of lasting elegance.

III. Iconic Products:

The Birkin and Kelly bags are among the most coveted and iconic luxury accessories globally.
These handbags, known for their craftsmanship and exclusivity, have become status symbols,
contributing significantly to the brand's recognition.

IV. Scarves and Accessories:

Hermès scarves, along with other accessories like belts and gloves, are highly distinctive and
instantly recognizable. The brand's commitment to excellence extends to these items, reinforcing
its image of sophistication.
V. Limited Editions and Artistic Collaborations:
Hermès regularly collaborates with artists and designers, creating limited-edition collections that
showcase unique and artistic designs. This approach adds an element of exclusivity and
collectibility to the brand's products.

VI. Corporate Social Responsibility:

Hermès places importance on sustainability and ethical practices, appealing to consumers who
prioritize responsible and mindful consumption. The brand's emphasis on longevity encourages
customers to view their purchases as long-term investments.

VII.Exclusivity and Rarity:

Hermès maintains a deliberate scarcity of its products, particularly the highly sought-after Birkin
and Kelly bags. This scarcity, combined with a rigorous vetting process for customers, enhances
the sense of exclusivity and luxury associated with the brand.

VIII.Consistent Brand Image:

Hermès has successfully maintained a consistent and aspirational brand image over the years. Its
commitment to excellence, luxury, and sophistication resonates with a discerning customer base
that values tradition and quality.

IX. Financial Success and Resilience:

Despite economic fluctuations, Hermès has demonstrated financial success and resilience in the
luxury goods market. The brand's ability to adapt to changing consumer preferences while
maintaining its core values has contributed to its enduring popularity.

Sales per Business for 2023

Hermès sales in 2023: Leather goods

dominate (43%), followed by clothing &
accessories (27%).
• Leather goods success: Iconic Birkin
& Kelly bags drive demand due to
luxury status, investment value, and
timeless design.
• Other strong categories: Other Hermès
trades (12%) show demand for lifestyle
products, silk & textiles (7%) highlight
enduring classics.
Why did I chose this company?
I chose this company because one I love their products and this brand is one of my favourite
luxury brands.
But the main reason i chose this company is because of it’s diversified portfolio causing it to
have rich and complex financials, therefore being the best choice for this project.

Shareholder Pattern for Hermès

Hermès is an independent company backed by family shareholders. The Hermès family members
have played a significant role in its
management. Through Émile Hermès SARL,
the controlling Hermès family holds a
66.70% stake in the company. This ensures
long-term vision and strategic decision-
making aligned with the family's values.

LVMH: French luxury giant LVMH holds a

1.87% stake, acquired to gain leverage in the
high-end market and potentially pave the
way for future collaborations.

Institutional Investors: Several institutional Shareholder Pattern for Hermès

investors, such as The Vanguard Group and
BlackRock, hold smaller stakes, adding diversity to the shareholder base.

Free Float: Approximately 31.43% of the shares are publicly traded on the Euronext exchange,
offering some public access to the company's ownership.

Sources of Finance

Primary Sources:
Shareholder Equity: This is the dominant source, evidenced by the high equity-to-debt ratio and
growth in equity. Investor confidence, retained earnings, and new issuances all contribute to this
vital pool of capital.
Internal Cash Flow: Hermès' profitable operations generate significant cash flow, providing
flexibility for investment, expansion, and debt repayment.
Secondary Sources:
Conservative Debt: Though minimal, strategic debt usage plays a role. Long-term loans and
bonds offer capital for specific projects or acquisitions without overly burdening the company.
Trade Credit: Deferred payments from suppliers offer short-term financing for inventory
purchases and operational needs.

Indirect Sources:
Joint Ventures and Partnerships: Strategic collaborations can provide access to resources,
markets, and joint funding opportunities.
Government Grants and Incentives: Depending on specific projects or investments, government
support can contribute to financing.
Asset Sales: Disposal of non-core assets can generate one-time cash injections for specific
purposes.
Factoring Receivables: Selling receivables at a discount can provide immediate cash but involves
a cost.
Leasing and Asset-Based Loans: These methods involve using existing assets as collateral for
financing specific acquisitions or projects.

Key Indicators
• Debt-to-equity ratio: 0.15 (very low,
indicating low financial risk)
• Net income margin: 20% (high,
indicating strong profitability)
• Cash and cash equivalents: €5.5 billion
(significant, providing financial
flexibility)
• Intangible assets: 54% of total assets
(relatively high, representing potential
value but also risk)
• Leather goods sales: 42.8% of total
sales
Ratios:
• Return on investment (ROI): 25%
(based on net income divided by
average total assets)
• Return on equity (ROE): 35% (based on
net income divided by average
shareholders' equity)
• Return on assets (ROA): 20% (based on
net income divided by average total
assets)
Strengths:
• Fortress of Equity: Hermès proudly stands tall with a remarkably low debt-to-equity ratio
of 0.16. This implies minimal reliance on debt, shielding the company from financial
turmoil and interest rate hikes. Its reliance on investor funds and retained earnings fosters
financial independence and stability, evident in the dominant size of the "Equity" section
compared to "Borrowings and financial liabilities."
• Profitability Powerhouse: With a net income margin hovering around 20%, Hermès
demonstrates its ability to extract impressive profits from its operations. This financial
muscle allows for strategic reinvestments, lucrative dividends for shareholders, and a
buffer against economic downturns.
• Liquidity Lifeline: Hermès boasts a substantial cash reserve exceeding €6 billion, acting as
a safety net and a springboard for future growth. This financial flexibility empowers them
to capitalise on unforeseen opportunities, weather economic storms, and pursue strategic
acquisitions.
•
Potential Weaknesses:
• Intangible Asset Maze: While valuable, intangible assets like goodwill and intellectual
property constitute over 20% of Hermès's total assets. These assets, reflected in the sizable
"Intangible assets" section, are challenging to value and susceptible to shifts in consumer
preferences or economic conditions. This dependence poses a potential risk if these
intangible assets fail to maintain their value.
• Leather Goods Labyrinth: Hermès derives over 40% of its sales from leather goods,
leaving their fortunes heavily intertwined with the success of this single product category.
This concentration, highlighted by the prominent "Leather goods" section, makes them
vulnerable to fluctuations in demand for luxury goods or the emergence of competitive
offerings.

Overall:
Hermès has a robust capital structure with low debt, strong profitability, and ample liquidity.
However, the company's reliance on intangible assets and one product category poses potential
risks.
Hermes equity soared 69% in 2022, fuelled
by:
Strong net income growth: Up 38% thanks to
higher sales and margins across all segments.
Increased from €127M to €630M, mainly due
to positive revaluation gains.
Subsidiary success: Non-controlling interests
rose from €11M to €16M.
Consolidated Statement of Cash Flows
Operating cash flow: Hermes' operating cash flow increased from €3,060 million in 2021 to
€4,111 million in 2022, a rise of 34%. This was driven by higher net income, as well as an
improvement in working capital.
Investing cash flow: Hermes' investing cash flow decreased from €(669) million in 2021 to
€(579) million in 2022. This was mainly due to a decrease in operating investments, such as
investments in property, plant and equipment.
Financing cash flow: Hermes' financing cash flow decreased from €(869) million in 2021 to
€(1,237) million in 2022. This was mainly due to an increase in dividends paid.
Net cash flow: Hermes' net cash flow increased from €1,978 million in 2021 to €2,528 million in
2022. This was driven by the increase in operating cash flow.
Net cash position: Hermes' net cash position increased from €6,695 million at the end of 2021 to
€9,223 million at the end of 2022.

Consolidated Statement of Cash Flows

 ELYSIUM

Beyond Birkins: Introducing Elysium, a Transcendent Evolution of Luxury Fashion

Imagine a brand that elevates the Hermès legacy, transcending mere luxury into a realm of avant-
garde craftsmanship and hyper-personalised experiences. This is Elysium, a visionary fashion
house where cutting-edge technology meets age-old artistry, forging bespoke luxury for the
discerning few.
Embrace a future where fashion becomes an extension of you.

Beyond Leather: Step into bio-fabricated elegance. Luminescent spider silk, shimmering cruelty-
free exotics, and ethically sourced fish leather redefine luxury with sustainable, ethical brilliance.

Augmented Couture: Co-create your dreams with master artisans. Immerse yourself in virtual
reality ateliers, witnessing the magic as sensors and smart textiles weave a dynamic, personalised
style experience.

Immersive Craft: Own the art of creation. Be there as your vision takes shape, guided by digital
precision and the delicate touch of a master artisan.

The Art of Scarcity: Wear a masterpiece. Limited-edition drops with visionary artists and
architects push the boundaries of fashion, transforming garments into wearable art.

This is Elysium. A future of personalised perfection, waiting to be crafted.

This intro captures the essence of both options, highlighting the key differentiators of Elysium:
sustainable materials, personalised experiences, immersive technology, and limited-edition
artistry. It creates a sense of exclusivity and innovation, while also inviting the audience to be
part of the experience.

Cultivating a Community:
Elysium caters to an affluent, tech-savvy clientele drawn to personalization and boundary-
pushing innovation. We build an exclusive community where members enjoy bespoke
experiences, early access to drops, and the thrill of owning a piece of the future.

Elysium is a brand, but it's also a statement. It's an invitation to transcend the predictable and
embrace a future where luxury meets ingenuity, craftsmanship fuses with technology, and every
garment tells a story of personalized perfection.
Some innovative ideas and venture for the year 2024-25
Interactive fashion shows: Allow guests to customise the runway experience through VR
headsets or wearable tech.

NFT-integrated garments: Unlock exclusive experiences or digital accessories tied to your

physical Elysium piece.

Sustainability at its core: Implement closed-loop manufacturing processes and source materials
responsibly.

Philanthropic partnerships: Support artisans and communities around the world through
dedicated initiatives.

Elysium's success hinges on:

Securing high-profile investors: Who understand the brand's disruptive potential and appreciate
its value proposition.

Building a skilled team: Of futurist designers, tech wizards, and master artisans capable of
realising Elysium's vision.

Cultivating an exclusive community: Of affluent, tech-savvy individuals drawn to the brand's

personalisation and boundary-pushing innovation.

France’s Economic Current Situation

High inflation: Rising costs of materials and production may necessitate higher price points or
operational efficiency.

Cautious consumer spending: Focus on building brand trust and showcasing unique value
propositions to attract customers.

Appetite for innovation: Potential for investors seeking to back disruptive and sustainable
businesses.

Capital Structure Of Elysium

Elysium's success hinges on securing high-profile investors who understand our disruptive
potential and appreciate our value proposition. We aim for a 70% equity, 30% debt structure,
attracting larger investments with less financial risk while emphasising investor confidence in
our long-term growth.
Capital Structure:
70% Equity (€35 million): High potential return on investment for investors due to lower cost of
capital compared to pure debt, but with higher initial dilution for founders and early backers.
30% Debt (€15 million): Mitigates financial risk compared to full equity funding, but increases
interest expenses and potential pressure from lenders to prioritise short-term profits.

This is because:
This type of structure will attract larger investments from venture capitalists or high-net-
worth individuals who appreciate Elysium's disruptive potential and long-term growth
prospects.

Lower reliance on debt reduces financial risk and interest expenses.

And help us gain greater control over operations and decision-making for the founding
team.
But,
There might be higher initial dilution of ownership for founders and early investors.

It requires a strong track record and compelling business plan to secure significant equity
funding.

And it ay be less appealing to risk-averse investors due to the inherent uncertainties of a

nascent brand.

Funding Plan

Source of Debt: Long-term business loan with a current rate of 3.19% p.a. as per the “Banque de
France” (Bank of France)

Advantages:
Higher potential for return on investment for investors due to lower cost of capital
compared to pure equity.
Greater financial flexibility for initial investments in technology, R&D, and marketing.
Attracts larger investments from venture capitalists or high-net-worth individuals who
believe in Elysium's long-term growth potential.

Disadvantages:
Higher overall financial risk due to increased debt burden.
Interest expenses may eat into profitability in the early stages.
Potential pressure from lenders to prioritise short-term financial performance over long-
term vision.
Initial Funding Requirement: €50 million
Funding Timeline:
Year 1: €35 million
Majority raised through Series A equity funding from venture capitalists focused on disruptive
technologies and luxury brands.
Potential for securing additional equity through grants and subsidies targeting innovation and
sustainability (French government programs).

Year 2: €15 million

Debt financing through long-term bank loans with manageable interest rates.
Consider convertible debt options to attract risk-averse investors while offering potential equity
upside later.

Benefits of this structure:

Higher initial funding amount compared to 50/50 structure.
Potentially attracts larger investments from venture capitalists who prefer higher equity risk-
reward profiles.
More control and flexibility for the founding team in early stages.

EBIT - EPS Calculation

EBIT-EPS Calculations

Income Statement
 Balance Sheet

Projected Financial Ratios (Year 1)

Liquidity Ratios:
Current Ratio: 5.8
Quick Ratio: 4.8
Return on Equity (ROE): 12.74%
Solvency Ratios:
Debt-to-Equity Ratio: 0.52 Activity Ratios:
Interest Coverage Ratio: 11.22 Inventory Turnover: 6
Accounts Payable Turnover: 15
Profitability Ratios:
Gross Profit Margin: 50% Other Indicators:
Operating Profit Margin: 16.7% Earnings per Share (EPS): €0.23
Net Profit Margin: 10.6% Internal Rate of Return (IRR): Estimated 25%

Conclusion
This analysis of Elysium's financial projections paints a promising picture for the future of this
high-end French fashion house. With its blend of innovative technology, sustainable materials,
and personalised experiences, Elysium is poised to disrupt the luxury fashion landscape. Elysium
has the potential to revolutionise the luxury fashion industry with its visionary approach. By
prioritising financial prudence, technological advancement, and customer-centricity, Elysium can
establish itself as a leader in the future of fashion.